make sure your midlevel offering is as profitable as possible.
by hitendra patil
the definitive success guide to client accounting services
when your prospects shop for client accounting services, what they find out about pricing methods and trends defines their expectations. if you follow very different approaches to price your cas offering, it will take significant effort on your part to educate the prospects (and existing clients) about why you are pricing cas the way you are.
more: cas pricing and the accounting profession | how cas communications are different | your firm’s processes can set you apart | technology and your cas clients | top five cas killers and how to overcome them | 21 ways to adjust your practice in 2021
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as they say, it’s easier to ride the horse in the direction it’s going. it is good to first conform to the perceptions of prospects when it comes to your cas pricing. once you ride the horse, you can direct it to the destination you want to take it to. once you conform to the pricing method (not the dollar value) expectations of the prospect, their anxiety and perception of risk (what value will they receive in the price they are willing to pay) reduce. after that, they are more open to evaluating the choices you present to them.
packaging cas offering levels
the main precursors of your cas pricing levels (dollar amounts) are the components of your cas offering levels. the most prevalent methods that firms use to package cas offering are generally based on:
- whether clients offload only after-the-fact work, part of the work or entire accounting work to the firm
- the types of work (number of services) firms do for different types of clients
- periodicity of service delivery
- level of predictability in the periodic amount of money client will pay in cas fees
- flexibility to charge for out-of-scope, finite, non-recurring projects
you might also want to take into consideration the pricing levels in your market, but let that not be the key guiding factor to set the dollar amounts of your cas packages.
based on the above-mentioned guiding principles, cas firms use the following methods to create the “packages” for their cas offerings:
- three levels, e.g., basic, intermediate, premium (or bronze, silver, gold)
- within each of these levels, firms define the periodicity of service delivery, e.g., basic can include monthly reporting whereas premium can consist of even daily or at least weekly service delivery
- level and depth of insights increases as the package level increases
- the expert time included in package “consultation and advisory” phone calls/meetings increases as clients opt for higher-level packages
- firms define scope of work for each package, but cas firms also illustrate clear examples of out-of-scope work. such out-of-scope work can be charged on a fixed-fee basis if it can be more or less well defined, or on an hourly basis if the complexity is not so easy to determine and the completion time expectations are aggressive. many firms call it the “one-time projects work.”
you will be tempted to base your dollar amounts per package based on the time your firm takes to complete an estimated, average volume of work in each of the three levels of your cas packages. but you will need to resist the temptation to do so. it is because you may not have yet fully optimized your cas processes and technology stack. in other words, your firm’s inefficiencies can increase your cost of producing cas work, and it is not fair to charge clients for such inefficiencies. remember, cas is about the usable outcomes you deliver to clients. time taken to produce the work is not an outcome that clients can use in any way. most clients will not even bother to recognize how you produce the work and how much time it takes to produce the work. for example, if you hire a new staff member and that person takes six months to become reasonably productive, you cannot and should not bill the cost of training that staff to the client. it is your firm’s cost of doing business. clients will and should pay only for the value of the outcomes they receive.
in the cas-fit assessment wizard that i created, i also created sample cas packages and their pricing level estimates. this wizard is not meant to be full-fledged consulting advice to help your firm work out your exact, customized cas pricing packages but just to give you a ready-made structure and guidance to get you started on your cas pricing analysis. to obtain this ms excel-based, easy-to-use wizard, you can connect with me on linkedin and send me a private message there. my linkedin profile is here: https://www.linkedin.com/in/hitendrapatil/
cas pricing risk management
cas clients prefer the fixed-fee pricing method because it removes the uncertainty of how much they will pay every month, i.e., it reduces clients’ risk. but this method can create a risk for your firm because if you do not estimate the volume, and the expertise required to deliver the services to each client, you can jeopardize your cas profitability.
it is, therefore, an absolute necessity that you include a beginning or trial price and an adjusted price clause in your cas engagement letter and the discussion with the cas prospects. the best way – and many cas firms figured this the hard way – is to ensure you minimize your cas pricing risk by getting the client to agree to:
- review the cas engagement after 60-90 days to relate the final cas pricing to the actual volume of work of each client.
- review the cas engagement every year to relate the growing or reducing volume of work based on the business volume trend of each client.
- you may include a clause that allows you to increase the price if the client’s work volume increases or decreases by, say, 10 percent or more.
prospects may balk at such clauses, and that should be your first alert about the client possibly being not a good fit for your higher level of cas package. but, it is also likely that prospects may not have experienced such clauses from their previous accountants, and hence it is essential to explain why you have that clause in the cas engagement letter.
if your prospect, who has been in business for more than a year, provides you (and ideally, you should insist) with past accounting databases, it will be possible for you to identify business transaction volume trends and the quantum thereof. in such a case, you can extrapolate the trend into the future and work out the likely volume of work you will do – and let such prospect know which of your cas packages will work the best for the prospect. give your reasoning to the prospect. in such cases, you can safely extend the “pricing revisit” clause to six months to a year, depending on the business volume trend. this method does not apply to startup companies and those that are in business for less than a year because you cannot easily estimate their business growth.
most business owners who are reasonably confident about their business growth prospects will not haggle over this “pricing revisit” clause.
how to pitch your cas packages
once you have crystallized components and pricing of your cas packages, the next important thing is to pitch the packages correctly to your prospects. this is where an understanding of human behavior science comes into play. “psychological pricing” is a fascinating line of consumer research, and there are tons of insights about it available online. i am taking some of the methods that i figured accounting firms are already leveraging out there. let us see what those are.
show your highest-priced cas level package first
by design, your highest-priced cas package will have the largest number of services (and outcomes) listed under it. by first showing this to the prospects, you are making them aware of what all your firm can deliver to them. many times, prospects forget to ask for some “good to have” services just because they are trying to move away from a current problem (pain point) on which they are focused. when they read all the service items listed, it creates an “anchoring effect,” i.e., a cognitive bias in which humans tend to rely too heavily on the first piece of information they see. the information that follows the first piece of information is invariably, subconsciously compared with the first piece of information. for cas packages, when you present the highest-level package first, it can result in prospects feeling they will “lose” some benefits of the highest package if they opt in for a lower package. this triggers another fundamental human need – the fear of loss, i.e., loss aversion need. several psychological experiments have proven that “losses loom larger than gains” (kahneman & tversky, 1979). fear of loss is considered about twice as powerful as the pleasure of gain. in other words, pitching “you will get these additional benefits if you purchase our higher cas package” is likely to be half as effective compared to pitching “if you purchase our next lower level of cas package, you will not have the benefit of these x number of actionable insights.”
the same anchoring effect also applies to the dollar price of your packages. if your prospect gets a “sticker shock,” let that happen first in the pricing discussion. if the prospect feels it is too expensive, it could very well be because the prospect’s business does not need higher, more profound levels of intelligence or the prospect may not have understood the value of such business intelligence (if so, please explain how such intelligence converts into what types of practical business decisions the prospect makes). the price tag will create a pressure on the minds of such prospects who haven’t grown their businesses to the level of receiving the ultimate intelligence professional accountants can provide. the moment such a prospect reads the services listed in the next lower level of your cas packages and the price tag thereof, the prospect’s mind compares the price with the “anchor price.” because the next price level is lower than the anchor price, the price pressure gets released immediately, and the prospect becomes more open to explore the next cas package. at the same time, your lowest-priced cas package can feel the “cheapest,” and more often than not, the prospect would want to avoid being seen as the one who made a “cheap choice.” it is, therefore, critically important that your intermediate package is as profitable as possible for your firm.
give your pricing “why”
your prospects and clients are not professional accountants or even educated in accounting. they simply do not know what it takes to produce the levels of work required to deliver the intelligence and insights they see in your cas packages. because they have little knowledge of your actual costs, the investments you have made into acquiring the accounting expertise needed, and your profit margins, they may perceive your pricing as “too expensive” or even “too low” (creating doubts about the quality of your work). these perceptions are based on external factors such as market price trends or what they have been paying until now. to overcome these external perceptions, you need to tell why your prices are what they are. it helps prospects correlate the cost and quality equation to make the pricing feel reasonable. some examples of your pricing why could be:
- “our <client industry> expert who will work on your account has helped x number of similar businesses in your industry based on our expert’s y number of years of experience in his/her career. about z percent of our clients in your industry have grown year on year by n percent.” or
- “a licensed cpa/bookkeeper/financial advisor will review your numbers every month to make sure you are getting the power of expertise what we have.” or
- “we guarantee 100 percent accuracy, and if we ever make any rarest of rare mistake, we will rectify the mistake at our cost and bear the statutory penalties, if any, because of our mistake.”
resist the urge to relate your price to your cost or the time it takes for you to produce the work. it is because a non-accountant cannot fathom why it should take so much time to produce the work and why it should cost so much.
defining the measurable value from each cas component
we discussed that you need to explain the why of your cas pricing. a price is a measurable number. “value” of each of your cas components also needs to be reasonably measurable for your clients and prospects to understand the why. this is easier said than done, and you need to keep rewriting the value statements, testing them and revising them.
the best way to define the measurable value of each of your cas components is to state it from the client’s perspective, i.e., which business decisions the client can make based on the information/insight/intelligence you provide in a given cas component, and under which circumstances. then state the measurable impact of such business decisions. e.g., “on an average, we help our clients reduce money stuck in inventory by 11 percent, which in many cases results in lower overdraft interest costs by about 1.3 percent annually.” without the numbers in your value statements, clients can feel you are pitching marketing fluff.
tip: think of the proverbial “what keeps clients up at night,” but think of it in the words clients describe those concerns/anxieties. e.g., if the client expresses, “i never know how much money i am really making,” you want to write the value of your “income statement” as “you will know exactly where the money came from, where it went and exactly how much you made after providing to taxes. we can deliver this peace of mind every week.”
how to make your cas pricing more profitable
marketing legend jay abraham (abraham.com) says there are only three ways to grow your business, but there are infinite combinations and variations of ways you can go about working with each of these areas. those three ways are:
- increase the number of clients
- increase the average transaction value
- increase the frequency of repurchase
while the first one above is directly related to the marketing and sales competencies of your firm, cas helps you achieve the next two. and your cas pricing can be adjusted to make those two ways more profitable for your firm.
increasing the transaction value
your cas packages, when designed expertly, can quickly move the prospects toward the higher level of price. it does not always mean you will do more work for the client. it can result in efficiency gains adding to the profitability, e.g., when staff works on a given client because the staff is producing multiple deliverables for the same clients, there is no need for that staff to keep switching between various clients’ work too frequently. in an interesting study, “programmer, interrupted: data, brains, and tools,” microsoft found that a programmer takes between 10-15 minutes to start editing the code after resuming work from an interruption. it also found that there can be as high as 20-30 percent overhead in “work resumption costs.” it is higher when information density is higher in a given task. accounting can be considered as high information density work for sure. multitasking, according to brain science, is a myth. “switching” between multiple client tasks is akin to work interruptions. when your staff produces deliverables for more service components for the same client at one go, your “cost” decreases, thereby increasing your profitability.
secondly, as you deliver more actionable insights to your cas clients, their business (should) grow, and that pushes the work volume upward. thus, your revenue from the client goes up.
thirdly, as the client’s business grows, the higher-end cas components become necessary for your clients. hence, they will end up upgrading to your next higher level of cas package, thereby resulting in revenue growth for your firm.
as you deliver consistent value, your clients generally want you to do more work for them. you can sell add-on services, partner services, solutions, and so on. this has a direct impact on your firm’s top line, as well as the bottom line.
in effect, cost reduction and revenue growth will have a double-whammy positive impact on your cas profitability.
increasing the frequency of repurchase
cas, by very design, requires longer-term agreements, i.e., providing periodic services to your cas clients is a must. contrast that with other work accountants do, e.g., tax return preparation, sales tax filing, quarterly/annual compliance and so on. when a client’s business grows, that client may need weekly reports instead of monthly. some clients may even need daily reports instead of weekly. an increase in the frequency of service delivery necessitates that clients pay your firm more fee commensurate with the outcomes they receive. “usage-based fee” is a concept well entrenched in the software solutions world. it also applies well to the cas world of accountants.
adjusting your cas profitability
when all of these things are happening, it gives you more data to analyze your firm’s cas profitability. it will be possible for you to allocate your operating costs to each client’s work and prepare a “per-client profitability” worksheet. you will invariably find that for the same cas package level, some clients are more profitable for your firm than others. you need to dig into the causes of why this is so. you might find causes like:
- some of your staff members need gap training to make them more productive.
- some of your clients are habitually late in responding to your firm’s information needs or advice.
- your process steps involve some information-capturing duplication across different steps.
- your firm is not taking optimal advantage of the software automation features for all clients.
- software solutions used for some clients are not as automated as those used for other clients (ideally, your firm should decide which software to use for client accounting and put as many clients on the same software as possible).
- you haven’t periodically researched the market for new software solutions. an accountant who serves over 800 small business clients invests 1 percent of top-line revenue in exploring new software every year.
- some/all of your clients’ niche/industry-specific software solutions do not integrate well with your accounting software.
- some clients’ work has outgrown the cas package level they subscribed to.
- your client service communications are not automated optimally.
- you are allowing clients to get ad hoc work processed without charge or you are answering unlimited client questions for free (check if you have a certain limit for “free consultations” in each cas level).
- you are not processing some client work that you should.
- your fundamental cas pricing itself was not profitable.
when you find the reasons, remedy them across that cas level to ensure a majority of clients within the same cas package are more or less similarly profitable for your firm.
one of my friends, an experienced cpa, increased the revenue of his cas practice by 75 percent in five years, without increasing the number of clients! now 65 percent of his firm’s revenue comes from cas and cfo services. it is because he managed to create and sell additional services to enhance the transaction value as well as repurchase frequency.